Collars And Price Floors Caps

Underlying risk reversal collar.

Collars and price floors caps.

These products are used by investors and borrowers alike to hedge against adverse interest rate movements. These latter two are a short risk reversal position. An interest rate collar can be created by buying a cap and selling a floor. Buying a put option at strike price x called the floor selling a call option at strike price x a called the cap.

Unlike for other options the system does not use the option data tab page to map caps floor and collars the option information is contained within the condition data and in the cash flow generated on the basis of the condition data. The premium income from selling the call reduces the cost of purchasing the put. An interest rate cap is a derivative in which the buyer receives payments at the end of each period in which the interest rate exceeds the agreed strike price an example of a cap would be an agreement to receive a payment for each month the libor rate exceeds 2 5. This creates an interest rate range and the collar holder is protected from rates above the cap strike rate but has forgone the benefits of interest rates falling below the floor rate sold.

You use template s40caflcol to map caps floors and collars as unstructured transactions in the source data layer sdl. While the collar effectively hedges. They are most frequently taken out for periods of between 2 and 5 years although this can vary considerably. Caps floors and collars 9 floor and floater coupons floor rate coupons of floater with a floor example.

Floor payments time 0 time 0 5 time 1 5 54 6 004 0 4 721 6 915 5 437 0 1395 4 275 consider a 100 notional of 1 5 year semi annual floor with.